November 29. 2015

Market Review

U.S. stocks finished the week nearly unchanged. The Dow Jones Industrial Average lost 0.1 percent over the week to close at 17,798.49. The S&P 500 was flat over the week and finished at 2,090.11. The Nasdaq added 0.4 percent from the week-ago close to 5,127.52. Among the key S&P sectors, consumer staples and energy were the top gainers and utilities the worst performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held above 15.

Short-Term Technical Condition

Apparently, the short-term oriented trend of the market remains almost unchanged compared to last week as the S&P 500 finished nearly flat for the week. The Trend Trader Index is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,070. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend, at least from a pure price point of view. The situation is slightly different if we analyze the overall trend momentum of the market. Especially, the weak readings from the Modified MACD are still indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this indicator is trading more or less sideways on quite low bullish levels, indicating that the recent consolidation period is likely to continue next week.

As already mentioned a couple of times, a consolidation period is considered to be a healthy one if it is being accompanied by an improvement in short- to mid-term market breadth, indicating that the market internals are strengthening. As a matter of fact, it was good to see that the readings from most of our tape indicators showed major signs of improvements last week. Especially, the strong surge/recovery in the short-term gauge from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily is telling us that the underlying tape momentum remains quite supportive for the time being. On top of that, we can see that the percentage of stockss which are trading above their short-term oriented moving averages (20/50) finished the week at quite encouraging levels, indicating a healthy rotation back into small caps! Above all, we can see that the High-/Low Index Daily also managed to flash a small bullish crossover signal last week. Despite the fact that this can be seen a quite encouraging tape signal, we think that the total amount of new highs should be a bit higher, if we consider the current levels from the S&P 500. As already mentioned last week, we think with the current breadth readings the market won?t rally towards new record highs immediately. Nevertheless, it was good to see that most of our tape indicators recovered and, therefore, the positive impulses for a year-end rally are increasing.

From a pure contrarian point of view, the overall technical picture of the market is also getting increasingly bullish on a very short-time frame. This is mainly due to the fact that the strong negative readings from the WSC Index Oscillator Weekly continued to weaken, whereas the Smart Money Flow Index hit a new all-time high last week. This indicates that the big guys have already started to prepare their portfolios for the year-end rally. Moreover, we can see that the WSC Capitulation Index is still signaling a risk-on environment for the time being.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market still looks quite vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index has not managed to pass its bullish 60 percent threshold yet! As already mentioned a couple of times, from a formal point of view, the market remains at risk for stronger pullbacks as long as its gauge keeps trading below that important threshold! Nevertheless, it was good to see that its gauge has shown a strong form of momentum recently as it climbed to almost 40 percent last week! If this trend continues it might be just a question of time until we receive a bullish signal within that indicator. But until this happens, the chances for a couple of rocky sessions remain high. Anyhow, from a pure price point of view, the market still remains intact. This is mainly due to the fact that the WSC Sector Momentum Indicator still remains quite bullish for the time being. This can be also seen if we have a closer look at our Sector Heat Map, as the majority of sectors still have a higher relative strength score than riskless money market. In such a scenario, most sectors tend to perform positive on an absolute basis. As a matter of fact, we think the downside potential of the market remains quite capped, although the Global Futures Trend Index is indicating a quite vulnerable market environment.

Another indication for that scenario is the fact that mid-term oriented market breadth showed also some signs of improvements last week. To be more precise, we can see that the overall tape momentum remains somehow supportive as the Modified McClellan Oscillator Weekly showed a small increasing bullish gap last week. Moreover, the odds for a year-end rally are increasing, as as mid-term oriented advancing issues as well as mid-term oriented up-volume gained some more bullish ground last week. Another encouraging signal is coming from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators strengthened for the week and have, therefore, turned bullish (100) or about to do so soon (150). This indicates that the total upside participation within the current rally is gearing up, which is absolutely necessary if the market wants to rally towards new record highs. Nevertheless, we can see that the absolute levels of most of our mid-term oriented tape indicators should be much stronger if we consider the current levels from the S&P 500. As matter of fact, further consolidation work on a very short-time frame looks quite likely.

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a difficult environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Above all, we can see that only 10 percent of all local market indexes around the world remain within a long-term oriented up-trend at the moment! This is telling us that the overall market environment remains highly selective in which broader diversified investors are strongly underperforming. Anyhow, long-term market breadth showed some signs of improvements last week as the Modified McClellan Volume Oscillator Weekly slightly strengthened its bullish signal, plus the amount of long-term new lows slightly decreased for the week. Nevertheless, the overall long-term trend participation still remains quite weak, as the percentage of stockss which are trading above their long-term oriented moving averages (200) have not turned bullish yet.

Bottom Line

The bottom line: our outlook remains almost unchanged compared to last week. Given the quite weak but somehow supportive readings within our indicator framework, we do not think the market has enough power to rally towards new record highs (levels above 2,120/2,130) immediately. On the other hand, it also appears that the down-side potential of the market looks quite capped as well. As a matter of fact our strategic bullish outlook remains unchanged for the time being. Nevertheless, we can see that the market internals have started to show some signs of improvements recently and, therefore, the chances for a year-end rally are increasing. However, on a very short-time frame we still think to see a bit of consolidation at work. Despite the fact that we do not believe to see a pullback below the recent August low at 1,867, a move towards 1,985 and 1,950 cannot be ruled out if the S&P 500 closes below 2,000. As a matter of fact, we would advise our conservative members to keep their stop loss around that limit. Stay tuned!